Brazil's successful return to the financial markets at the end of April and the strengthening of the country's currency, the real, have shown that the election of President Luiz Inácio da Silva (Lula) has not led to a collapse of foreign confidence. But nor do recent positive developments eliminate the need for structural economic reforms. Lula recognizes that progress in this area, including labor market reform, is critical if Brazil is to grow sufficiently to allow him to carry on his ambitious social agenda.

How Lula, a former metal worker and founder of CUT, which also represents most automobile workers, manages relations with the trade unions will be critical. Recent strikes by car workers at General Motors, Renault, Volvo, and Ford factories in Brazil do not augur well. Proposed social security and tax reforms, presented to Congress at the end of April, seem to be creating additional tension.

Lula should look to Europe for examples of how to achieve high rates of growth and job creation yet maintain social protection. Europe also can provide a roadmap for politicians determined to move from being anti-market left-wingers in opposition to reform-minded statesmen holding power. Spain's Felipe González and Britain's Tony Blair both made that journey. But a better example may be Wim Kok, who stepped down last year after eight years as Dutch Prime Minister. Both Lula and Kok share the unusual distinction of becoming heads of government after serving as trade union leaders.

Upon reaching the top of the FNV, Holland's largest trade union, Kok found himself in a position of considerable influence in Dutch economic policymaking. During his tenure as a union leader in the late 1970s and early 1980s, the Dutch economy experienced prolonged malaise--stagnant growth, high unemployment, prohibitive interest rates, and low corporate profitability. Large fiscal deficits crowded out private investment.

Holland's problems were mainly structural, although a cyclical economic downturn made matters worse. By 1982, the situation had deteriorated to the point that the "social partners" in the Dutch tripartite system (government, business, and trade unions) concluded that combating the crisis required a break with the past.

The defining moment came with the Wassenaar agreement of that year--a pact between employers and trade unions, reached with the active encouragement of government. Trade unions agreed to moderate wage claims and abandon wage indexation, in exchange for reduced working time and improved prospects for the future.

The increased flexibility of the Dutch labor market eventually restored private-sector profitability and led to rapid job creation, among the highest in Europe and comparable to the rate in the US. A prudent fiscal stance, pursued while the economy recovered and interest rates fell, created room for big cuts in taxes and social contributions. With lower inflation, this raised workers' real disposable income, enabling trade union leaders to demonstrate to their members that wage moderation worked and was in their interest.

The recent, much weaker, performance of the Dutch economy is largely explained by strong wage increases, which undermined competitiveness and contributed to job extinction. This prompted Kok to call last year--on the 20 ^th anniversary of the Wassenaar accord--for a new pact among the country's social partners. He will soon have a European-wide platform to deliver his message of wage moderation and labor-market flexibility through his assignment to breathe new life into the EU employment strategy.

How is the Wassenaar model relevant to Brazil? Not unlike Holland in the early 1980s, Brazil's economy today faces the challenge of stimulating rapid employment growth amid fiscal constraints and high interest rates. While Brazil's registered unemployment rate is not very high by regional standards, its fast growing labor force requires a high rate of job creation. Emulating the Dutch experience with job creation provides the surest possible path to alleviating poverty in Brazil.

The idea is not that Brazil should seek to implement the Dutch social-economic model--the countries are too different for that. But Lula can and should follow Kok's example and use his trade union connections, as well as his rapport with the working class, to achieve a social pact aimed at achieving sustained improvement in Brazil's overall economic performance and realizing its potential to become Latin America's economic powerhouse.

Brazil has benefited from an improvement in market sentiment and financial indicators since Lula's election. Now its government should encourage a Wassenaar-style guarantee of social peace. This would give the authorities room to address the country's daunting longer-term policy agenda--including a major reform of the costly pension system, an overhaul of the tax system, and strengthening the bankruptcy framework--that Brazil must face in order to boost competitiveness.

Lula's countrymen, who elected him overwhelmingly, need rapid economic growth and job creation. That will happen only if Lula completes a successful transformation from anti-market trade union leader into a statesman judiciously blending economic and social reform. Success would benefit not only Brazil, but have a strong demonstration effect across Latin America.